- Thirty years of technological development.
- Seasonality and Volatility, an indissoluble relationship?
- Current situation and its possible outlooks.
Thirty years of technological development.
Natural Gas is a commodity characterized by high volatility and closely linked to seasonal aspects.
Or at least that's what we've always known about it.
In the past thirty years the fundamentals of the gas market, its structure and characteristics have changed radically.
Technological development has allowed modifying 2 crucial aspects:
- extraction through Hydraulic Fracturing (Fracking)
- distribution thanks to the liquefaction process. ( LNG)
The use of hydraulic fracturing for the extraction of Oil and Natural Gas has significantly increased production, consequently lowering consumer prices. Since the early 2000s natural gas has proved to be cheaper, less volatile and with lower greenhouse gas emissions, overtaking coal in energy production. About two-thirds of the United States' oil and gas are produced by fracking.
Liquefied Natural Gas ( LNG) is obtained by subjecting Natural Gas ( NG) to appropriate treatments that make it a transparent and odorless liquid with a specific volume of about 600 times less than the initial product. It is evident that this process has surprisingly greatly expanded the distribution range of Natural Gas, previously referred to as the dependencies of the American pipeline network, while it is now able to travel all over the world onboard LNG carriers.
Cheap Natural Gas has led to a doubling of the share of energy produced with hydroelectric, wind and solar technologies, which have long suffered from high costs for the construction of the plants.
Seasonality and Volatility, an indissoluble relationship?
As we have anticipated, natural gas is a seasonal product, so the price varies according to the season and the different needs for the use of the raw material.
We can summarize saying that the price tends to reach its annual minimum in July and its maximum at the end of November / December. Within this movement we can highlight 3 distinct trends:
- bullish from mid-February to late April
- bearish from May to July
- bullish from July to the end of November
The main reason for this can be explained by the fact that as production companies anticipate the need for utilities to produce more electricity to handle air-conditioning demand, we'll have higher prices in early summer, and then to an increase during the end of the year when starting the winter heating cycle.
A certain part of this seasonal volatility has decreased compared to previous years due to the growth of the market.
Briefly, we can say that since 2008 the NG has not been traded above $ 10 for MMBtu (Million British thermal unit) and since 2014 the $ 5 level is only a distant memory.
Current situation and its possible outlooks.
In the last year, Natural Gas has lost almost 60% of its value, putting a negative performance behind the other.
The progressive drop in prices we are witnessing is caused by a super production from the United States and a warmer than expected winter (2018/2019). (Mild winter = Less use of gas for heating).
This has therefore generated high inventory levels for the current year. Natural Gas inventories as of January 3, 2020 were 19.8% higher than last year, which helped bring natural gas futures prices to their 2016 lows. (Source U.S. Energy Information Administration)
While I'm writing I have the NG card in front of me, with its closing on Friday January 17 at $ 1.9970 and the opening on Monday 20, with a bearish gap (It hasn't covered the gap and seems not to be the time to do that yet), which brought the price to $ 1.8360 support created in March 2016.
We, therefore, broke the $ 2.00 level, a more psychological than a technical threshold, sailing us into an area that we hadn't seen in the last 4 years.
In early November the price boost to 2.7500 making the year top and an interesting divergence, that drive NG downward to 2.2500 in just 3 weeks.
The Triangle Breakout that occurred and the subsequent BPC pattern (Breakout - Pull Back - Continuation) does not bode well for the bulls in the short term.
Moreover, as we said earlier, the seasonality and experience of previous years teach us that until mid-February it is not safe to go into purchasing operations.
It is far more reasonable to follow the clues trading what we see on the charts.
So my vision is still short for weeks to come.
The target of $ 1.7500, support of February 2016, is on the way yet.
When it is reached it will be time to understand whether to take full profit or leave a small part of the trade still open for subsequent possible downwards.
It is clear that, if we find ourselves in mid-February with the price kissing $ 1.7500, we will close our Short positions in preparation for the likely bullish rally.